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India and China face huge education challenge

This article was printed in the Financial Times on 19th January 2015 in the widely read Beyond BRICS blog:

By 2030, the economies of India and China together may contribute 65 per cent of global GDP and be home to the majority of the world’s working age population. India alone will possess the world’s biggest pool of potential employees.

But the giddy predictions of future growth seem more fragile when it is considered that this potential labour force is dependent on education systems that often fail to teach basic skills.

A global survey in 2012 of more than 1,200 CEOs found more than half were concerned that talent shortages would constrain growth, particularly in Asia and other emerging economies. Over 40 per cent of Indian CEOs said they had shelved or delayed an initiative because of talent-related constraints.

This skills shortage risks stifling future growth. However, to date, business worldwide has shown little enthusiasm for investing in education itself. This week the Varkey Foundation published the world’s first study into global corporate social responsibility (CSR) spend on education by Fortune Global 500 companies. It found that these companies only spend $2.6bn – 13 per cent – of their total annual CSR budget of $19.9bn on education-related projects. Less than half provide any spending on education-related CSR at all.

The report finds that Chinese companies, in particular, score fairly low when it comes to spending on education. Chinese Company Law (Article 6 of Companies Law of the People’s Republic of China) requires companies to “undertake social responsibility” while conducting business. But across the 95 Chinese companies in the Fortune Global 500 list, just $52m a year was spent on education related CSR. Nearly all was spent within the country, with a small proportion identified as spent in Africa. Interestingly, half this education CSR spend was committed to infrastructure whilst 28 per cent went on primary education and only 5 per cent went to secondary education.

Even though the quality of reporting is extremely variable in China, it seems that Chinese companies, on the face of it, spend a lot less on education related CSR than their US and European counterparts. The eight Spanish companies in the Fortune Global 500 spend US$344m a year on education related CSR activities whilst the 132 US companies in the Global Fortune 500 spend $1bn.

Encouragingly, CSR reporting is rapidly increasing in China, which should provide more robust statistics. According to a report published last year by the SynTao think tank, only one company reported on CSR in 1999, but this stood at more than 1,700 in 2012.

So does India fare better?The report shows that the eight Indian companies in the Fortune Global 500 spend $15m in total – again relatively low compared to their European and US counterparts. However, this picture is changing fast; we can hope for an upturn in Indian education related CSR spend. Under new rules that came into effect in April last year, India is now one of the few countries in the world with a law for mandatory CSR spend. Large companies are required to spend a minimum of two per cent of their average net profits on CSR-related activities.

To further complicate the picture, whilst the report identifies the individual education related CSR spend of the Tata entities in the Fortune Global 500 it does not recognise all the philanthropic efforts of the vast Tata empire. Tata Sons, the holding company for more than 90 Tata entities from Tata Steel to Tata Motors, is 66 per cent owned by trusts. This means that roughly two thirds of profits across all the Tata companies have supported an assortment of Indian philanthropic causes over a century.

This Indian culture of self-help may be as a result of enlightened self interest; faced with poor skills, Indian industry has for long resorted to training its own workers. For instance, IT giant Infosys established its own Global Education Centre which trains thousands of new recruits in technical, communications and management skills.

The report also finds that when Indian companies spend on education they spend well. In general, education-related CSR projects globally are often low-value, unstructured and un-coordinated. However, spending on education by companies in India is often institutionalised, long-term, and needs-based. Furthermore, over two thirds of Indian education related CSR spend goes directly to schools (39 per cent to primary and 29 per cent to secondary). In fact, most of the Indian companies in the Fortune Global 500 list run schools for underprivileged children in urban areas, teaching them basic literacy and numeracy.

India and China have seen wage increases significantly higher than corresponding increases in developed economies, a sign of a short supply of skilled talent. So unless emerging economies prioritise education-related CSR spend then this shortage of skills will threaten profitability.

The Center for Universal Education at the Brookings Institution have found that $1 invested in education today in India returns $53 in value to the employer at the start of a person’s working years. Companies would do well to remember that, without adequate skills, those predictions of soaring economic growth might turn out to be a historic missed opportunity.